Covered Bonds - DG Hyp

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<strong>DG</strong> HYP COVERED BONDS – PFANDBRIEFE – QUALITY THE PATH OUT OF THE CRISIS SPECIAL MAY 2009 Illustrative liquidity-gap calculation Day Cover pool cash flow Pfandbrief cash flow Daily variance Cumulative variance 1 50 0 50 50 2 100 50 50 100 3 80 0 80 180 4 50 100 -50 130 5 100 400 -300 -170 6 50 0 50 -120 7 80 0 80 -40 8 70 80 -10 -50 9 50 100 -50 -100 … 0 -100 … 0 -100 180 110 0 110 10 Source: DZ BANK Our understanding of the approach for calculating the minimum necessary liquidity requirement is that the bank determines each day’s variances (between cash inflows and outflows) for a 180-day period, and adds these together to give the same number of cumulative daily variances. The resulting biggest negative cumulative daily variance – only the negative totals that stem from a cover shortfall present a risk that requires managing – has to be remedied by cover and overcollateralisation in the form of ECB-eligible assets. Our example shows a liquidity gap of EUR 170,000 on day 5. Although the question of liquidity gaps caused by excessive maturity transformation in the cover pool only becomes important when things get serious (the issuer-insolvency scenario with subsequent separation of the cover pool), it is precisely this issue that not only the rating agencies but also investors are zooming in on when rating and analysing covered bonds and specifically pfandbriefe. This new regime has seen the legislators move a long way in the direction of the permanent liquidity reserves that the rating agencies have called for. In the present crisis situation however, even a 180-days cover period can be criticised as inadequate seeing that a broad-based systemic crisis can never be definitely ruled out. In this scenario however, absolutely strict cover matching would be the only way to guarantee real security – and this requirement would be pretty difficult to impose on issuers (mainly, but not solely, on cost considerations). Cumulative daily variances Absolute certainty is impossible to guarantee in practice 24
<strong>DG</strong> HYP COVERED BONDS – PFANDBRIEFE – QUALITY THE PATH OUT OF THE CRISIS SPECIAL MAY 2009 Possible cash-flow pattern over a 180-day period EURk 1000 800 600 400 200 0 Days 1 2 3 4 5 6 7 8 9 …. 180 Source: DZ BANK Transparency regulations accumulated incoming cash flows accumulated outgoing cash flows accumulated incoming cash flows + biggest liquidity gap The rules governing the provision of information (transparency regime) have been widened significantly by the introduction of the PfandBG and its recent revision. §28 PfandBG obliges pfandbrief banks to publish, on a quarterly basis and in publicly accessible form, information on the total volume of pfandbriefe outstanding as well as their cover assets, though the quarter from which the data is compiled is not specified in more detail. The total volume of the pfandbriefe issued in each pfandbrief category as well as the corresponding cover pools in the amount of the nominal value and net present value (plus the risk-adjusted net present value in the case of stress scenarios) must be stated. In addition, the maturity structure of the pfandbriefe as well as the fixed-interest period of the cover pools (broken down into seven maturity bands) must be published. The share of derivatives included in the cover pools must also be notified. Regular publication duties... ... specifically for mortgage pfandbriefe: ... specifically for public sector pfandbriefe: Breakdown of the cover assets (in nominal-value terms) according to � � � � � the amount of the individual loans in increments up to EUR 300,000, from EUR 300,000 to 5,000,000, and more than EUR 5m; the states in which the land is located; the type and use of the building; the aggregate value of the arrears (at least 90 days) on the claims in the cover pool; Additionally, extensive details on the mortgage-pfandbrief cover pool must be included in the Notes to the Financial Statements; these details include the number of foreclosure sales during the year. Source: DZ BANK � � geographical breakdown of the claims (by state) and type (central, regional or local government); the aggregate value of the arrears (at least 90 days) on the claims in the cover pool. 25
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Covered Bonds - DG Hyp

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